Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2024
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission File Number 1-32414
W&T OFFSHORE, INC.
(Exact name of registrant as specified in its charter)
Texas
72-1121985
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
5718 Westheimer Road, Suite 700, Houston, Texas
77057-5745
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (713) 626-8525
Securities registered pursuant to section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.00001
WTI
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every interactive data file required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer
Non-accelerated filer ☐
Smaller reporting company
☐
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company. Yes ☐ No ☑
As of July 31, 2024, there were 147,182,248 shares outstanding of the registrant’s common stock, par value $0.00001.
W&T OFFSHORE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I – FINANCIAL INFORMATION
1
Item 1.
Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2024 and December 31, 2023
Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2024 and 2023
2
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three Months and Six Months Ended June 30, 2024 and 2023
3
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2024 and 2023
4
Notes to Condensed Consolidated Financial Statements
5
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
14
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
26
Item 4.
Controls and Procedures
27
PART II – OTHER INFORMATION
28
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
SIGNATURE
30
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
June 30,
December 31,
2024
2023
Assets
Current assets:
Cash and cash equivalents
$
123,375
173,338
Restricted cash
4,417
Accounts receivable:
Oil, NGL and natural gas sales
71,547
52,080
Joint interest, net of allowance for credit losses of $11,358 and $11,130 as of June 30, 2024 and December 31, 2023, respectively
20,478
15,480
Other
2,223
2,218
Prepaid expenses and other current assets (Note 11)
25,890
17,447
Total current assets
247,930
264,980
Oil and natural gas properties and other, net of accumulated depreciation, depletion and amortization of $8,284,392 and $8,213,781 as of June 30, 2024 and December 31, 2023, respectively
802,401
749,056
Restricted deposits for asset retirement obligations
22,479
22,272
Deferred income taxes
42,365
38,774
Other assets
33,396
38,923
Total assets
1,148,571
1,114,005
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable
89,129
78,857
Accrued liabilities (Note 11)
29,004
31,978
Undistributed oil and natural gas proceeds
63,150
42,134
Advances from joint interest partners
2,565
2,962
Current portion of asset retirement obligations (Note 5)
35,627
31,553
Current portion of long-term debt, net (Note 3)
14,925
29,368
Total current liabilities
234,400
216,852
Asset retirement obligations (Note 5)
498,848
467,262
Long-term debt, net (Note 3)
376,979
361,236
Other liabilities
16,668
19,420
Commitments and contingencies (Note 6)
16,671
18,043
Shareholders’ equity:
Preferred stock, $0.00001 par value; 20,000 shares authorized; none issued at June 30, 2024 and December 31, 2023
—
Common stock, $0.00001 par value; 400,000 shares authorized; 150,032 issued and 147,163 outstanding at June 30, 2024; 149,450 issued and 146,581 outstanding at December 31, 2023
Additional paid-in capital
589,678
586,014
Retained deficit
(560,508)
(530,656)
Treasury stock, at cost; 2,869 shares
(24,167)
Total shareholders’ equity
5,005
31,192
Total liabilities and shareholders’ equity
See Notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
Three Months Ended June 30,
Six Months Ended June 30,
Revenues:
Oil
110,965
89,982
217,980
186,982
NGLs
8,160
10,385
15,629
18,180
Natural gas
21,910
23,438
43,526
48,242
1,722
2,376
6,409
4,502
Total revenues
142,757
126,181
283,544
257,906
Operating expenses:
Lease operating expenses
73,987
66,021
144,817
131,207
Gathering, transportation and production taxes
8,578
6,802
16,118
12,938
Depreciation, depletion, and amortization
36,674
28,177
70,611
50,801
Asset retirement obligations accretion
8,400
7,717
16,369
15,227
General and administrative expenses
21,354
17,393
41,869
37,312
Total operating expenses
148,993
126,110
289,784
247,485
Operating (loss) income
(6,236)
71
(6,240)
10,421
Interest expense, net
10,164
10,323
20,236
25,036
Derivative loss (gain), net
2,374
(829)
(2,503)
(40,069)
Other expense (income), net
1,250
(311)
6,480
(78)
(Loss) income before income taxes
(20,024)
(9,112)
(30,453)
25,532
Income tax (benefit) expense
(4,636)
2,997
(3,591)
11,636
Net (loss) income
(15,388)
(12,109)
(26,862)
13,896
Net (loss) income per common share:
Basic
(0.10)
(0.08)
(0.18)
0.09
Diluted
Weighted average common shares outstanding:
146,943
146,452
146,900
146,435
149,045
Condensed Consolidated Statements of Changes in Shareholders’ Equity
Common Stock
Additional
Total
Outstanding
Paid-In
Retained
Treasury Stock
Shareholders’
Shares
Value
Capital
Deficit
Equity
Balances at March 31, 2024
146,857
588,563
(543,637)
2,869
20,760
Cash dividends
(1,483)
Share-based compensation
1,386
Stock issued
305
Shares withheld related to net settlement of equity awards
(271)
Net loss
Balances at June 30, 2024
147,162
Balances at March 31, 2023
146,461
577,787
(518,783)
34,838
2,087
20
(25)
Balances at June 30, 2023
146,481
579,849
(530,892)
24,791
Balances at December 31, 2023
146,581
(2,990)
4,418
581
(754)
Balances at December 31, 2022
146,133
576,588
(544,788)
7,634
4,009
348
(748)
Net income
Condensed Consolidated Statements of Cash Flows
Operating activities:
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation, depletion, amortization and accretion
86,980
66,028
Amortization and write-off of debt issuance costs
2,336
4,363
Derivative gain, net
Derivative cash settlements, net
4,957
(4,427)
Deferred income (benefit) taxes
11,580
Changes in operating assets and liabilities:
Accounts receivable
(24,470)
24,929
Prepaid expenses and other current assets
(5,744)
26,992
Accounts payable, accrued liabilities and other
25,564
(45,828)
Asset retirement obligation settlements
(11,997)
(11,841)
Net cash provided by operating activities
49,088
49,632
Investing activities:
Investment in oil and natural gas properties and equipment
(13,656)
(25,337)
Acquisition of property interests
(80,635)
Purchase of corporate aircraft
(8,983)
Purchases of furniture, fixtures and other
(97)
(218)
Net cash used in investing activities
(94,388)
(34,538)
Financing activities:
Proceeds from issuance of 11.75% Notes Senior Second Lien Notes
275,000
Repayment of 9.75% Second Senior Lien Notes
(552,460)
Repayments of Term Loan
(19,181)
Repayments of TVPX Loan
(550)
(183)
Debt issuance costs
(405)
(7,252)
Payment of dividends
(2,954)
Net cash used in financing activities
(4,663)
(304,824)
Change in cash, cash equivalents and restricted cash
(49,963)
(289,730)
Cash, cash equivalents and restricted cash, beginning of year
177,755
465,774
Cash, cash equivalents and restricted cash, end of period
127,792
176,044
NOTE 1 — NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of Operations
W&T Offshore, Inc. (with subsidiaries referred to herein as the “Company”) is an independent oil and natural gas producer with substantially all of its operations offshore in the Gulf of Mexico. The Company is active in the exploration, development and acquisition of oil and natural gas properties. The Company operates in one reportable segment.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and an interest in Monza Energy LLC (“Monza”), which is accounted for under the proportional consolidation method. All intercompany accounts and transactions have been eliminated in consolidation. These condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
Operating results for interim periods are not necessarily indicative of the results that may be expected for the entire year. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in Part II, Item 8. Financial Statements and Supplementary Data of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Annual Report”).
Certain reclassifications have been made to the prior year’s condensed consolidated financial statements to conform to the current year’s presentation. On the Condensed Consolidated Balance Sheets, the Company has combined Income tax payable with Accrued liabilities and Deferred income taxes with Other liabilities. On the Condensed Consolidated Statements of Cash Flows, the Company has combined lines within operating cash flows and investing cash flows. These reclassifications had no effect on the Company’s results of operations, financial position or cash flows.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
NOTE 2 — ACQUISITION
On December 13, 2023, the Company entered into a purchase and sale agreement to acquire rights, titles and interest in and to certain leases, wells and personal property in the central shelf region of the Gulf of Mexico, among other assets, for $72.0 million. The transaction closed on January 16, 2024 for $77.3 million (including closing fees and other transaction costs) and was funded using cash on hand. The Company also assumed the related asset retirement obligations (“AROs”) associated with these assets.
The acquisition was accounted for as an asset acquisition, which requires that the total purchase price, including transaction costs, be allocated to the assets acquired and the liabilities assumed based on their relative fair values. The fair value measurements of the oil and natural gas properties acquired and ARO assumed were derived utilizing an income approach and based, in part, on significant inputs not observable in the market. These inputs represent Level 3 measurements in the fair value hierarchy and include, but are not limited to, estimates of reserves, future operating and development costs, future commodity prices, estimated future cash flows and appropriate discount rates. These inputs required significant judgments and estimates by the Company’s management at the time of the valuation.
Notes to Condensed Consolidated Financial Statements (continued)
The following table presents the Company’s allocation of total purchase consideration to the identifiable assets acquired and liabilities assumed based on the fair values on the date of acquisition (in thousands):
January2024
Oil and natural gas properties and other, net
94,970
Asset retirement obligations
(17,647)
Allocated purchase price
77,323
In February 2024, the Company received a final settlement statement for its September 2023 acquisition of working interest in certain oil and natural gas producing properties in the central and eastern shelf region of the Gulf of Mexico and recorded an additional $3.3 million of oil and natural gas properties.
NOTE 3 — DEBT
The components comprising the Company’s debt are presented in the following table (in thousands):
Term Loan:
Principal
114,159
Unamortized debt issuance costs
(2,499)
(3,052)
111,660
111,107
11.75% Senior Second Lien Notes due 2026:
(4,019)
(5,090)
270,981
269,910
TVPX Loan:
10,475
11,025
Unamortized discount
(1,027)
(1,294)
(185)
(144)
9,263
9,587
Total debt, net
391,904
390,604
Less current portion, net
(14,925)
(29,368)
Long-term debt, net
On March 17, 2024, the term loan provided for by the credit agreement entered into by Aquasition LLC and Aquasition II LLC (the “Term Loan”) was amended to provide for (i) the deferral of $30.1 million of principal repayments during 2024; (ii) the resumption of principal repayments in the first quarter of 2025 with the option, but not obligation, to catch up on deferred amortization through excess cash flow sweep; (iii) the payment of cash interest each quarter on the remaining principal balance; (iv) the payment of an amendment fee of $0.2 million to be paid in four quarterly installments of $50,000 each, starting in the first quarter of 2024; and (v) the modification of the optional prepayment schedule as follows: redemption at 103% of par from May 2024 to May 2026, redemption at 102% of par from May 2026 up to May 2027, and 101% of par from May 2027 up to maturity in May 2028. The premium will be applicable to the aggregate principal amount outstanding at the time of any optional redemption.
6
During the six months ended June 30, 2024, the Company entered into a series of amendments to extend the maturity date of the Sixth Amended and Restated Credit Agreement (the “Credit Agreement”). Most recently, the Company entered into the Nineteenth Amendment on June 28, 2024 to (i) extend the maturity date to December 31, 2024, (ii) prohibit the use of loan proceeds to pay other Indebtedness (as defined in the Credit Agreement) and (iii) lower the excess cash balance sweep threshold. As of June 30, 2024, the borrowing base under the Credit Agreement was $50.0 million and there were no borrowings outstanding. In addition, no borrowings had been incurred under the Credit Agreement during the six months ended June 30, 2024. As of both June 30, 2024 and December 31, 2023, the Company had $4.4 million outstanding in letters of credit which have been cash collateralized.
As of June 30, 2024, the Company was in compliance with all applicable covenants.
NOTE 4 — FINANCIAL INSTRUMENTS
The Company’s financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities, derivative instruments and debt. Except for derivative instruments and debt, the carrying amount of the Company’s financial instruments approximates fair value due to the short-term, highly liquid nature of these instruments.
Derivative Instruments
The following table reflects the contracted volumes and weighted average prices under the terms of the Company’s open derivative contracts as of June 30, 2024:
Average
Instrument
Daily
Weighted
Production Period
Type
Volumes
Strike Price
Put Price
Call Price
Natural Gas - Henry Hub (NYMEX)
(Mmbtu) (1)
($/Mmbtu)
August 2024 - Dec 2024
calls
65,000
9,945,000
6.13
Jan 2025 - Mar 2025
62,000
5,580,000
5.50
swaps
65,359
10,000,000
2.45
63,333
5,700,000
2.72
Apr 2025 - Dec 2025
puts
62,182
17,100,000
2.27
Jan 2026 - Dec 2026
55,890
20,400,000
2.35
Jan 2027 - Dec 2027
52,603
19,200,000
2.37
Jan 2028 - Apr 2028
49,587
6,000,000
2.50
(1)
MMbtu – Million British Thermal Units
The Company has elected not to designate its derivative instruments contracts for hedge accounting. Accordingly, commodity derivatives are recorded on the Condensed Consolidated Balance Sheets at fair value with settlements of such contracts, and changes in the unrealized fair value, recorded as Derivative loss (gain), net on the Condensed Consolidated Statements of Operations in each period presented.
The fair value of the Company’s derivative financial instruments was recorded in the Condensed Consolidated Balance Sheets as follows (in thousands):
1,961
1,180
6,755
10,068
Accrued liabilities
8,945
6,267
2,756
7
The Company measures the fair value of its derivative instruments by applying the income approach, using models with inputs that are classified within Level 2 of the valuation hierarchy. The income approach converts expected future cash flows to a present value amount based on market expectations. The inputs used for the fair value measurement of derivative financial instruments are the exercise price, the expiration date, the settlement date, notional quantities, the implied volatility, the discount curve with spreads and published commodity future prices.
Although the Company has master netting arrangements with its counterparties, the amounts recorded on the Condensed Consolidated Balance Sheets are on a gross basis.
The impact of commodity derivative contracts on the Condensed Consolidated Statements of Operations were as follows (in thousands):
Realized (gain) loss
(364)
300
(4,119)
530
Unrealized loss (gain)
2,738
(1,129)
1,616
(40,599)
Debt
The following table presents the net values and estimated fair values of the Company’s debt (in thousands):
June 30, 2024
December 31, 2023
Net Value
Fair Value
Term Loan
108,371
108,467
11.75% Notes
282,923
283,443
TVPX Loan
9,776
10,156
401,070
402,066
The fair value of the TVPX Loan and the Term Loan were measured using a discounted cash flows model and current market rates. The fair value of the 11.75% Notes was measured using quoted prices, although the market is not a highly liquid market. The fair value of debt was classified as Level 2 within the valuation hierarchy.
NOTE 5 — ASSET RETIREMENT OBLIGATIONS
AROs represent the estimated present value of the amount incurred to plug, abandon and remediate the Company’s properties at the end of their productive lives. A summary of the changes to ARO is as follows (in thousands):
Asset retirement obligations, beginning of period
498,815
466,430
Liabilities settled
Accretion expense
Liabilities acquired
17,647
Liabilities incurred
113
Revisions of estimated liabilities
13,641
10,903
Asset retirement obligations, end of period
534,475
480,832
Less: Current portion
(35,627)
(37,763)
Long-term
443,069
8
NOTE 6 — CONTINGENCIES
Appeal with the Office of Natural Resources Revenue
In 2009, the Company recognized allowable reductions of cash payments for royalties owed to the Office of Natural Resources Revenue (the “ONRR”) for transportation of its deepwater production through subsea pipeline systems owned by the Company. In 2010, the ONRR audited calculations and support related to this usage fee, and ONRR notified the Company that they had disallowed approximately $4.7 million of the reductions taken. As of June 30, 2024, the Company has accrued $5.0 million related to this matter, consisting of $4.7 million for the disallowed reductions and $0.3 million for estimated penalties. The Company disagrees with the position taken by the ONRR and filed an appeal with the ONRR. The Company was required to post a surety bond in order to appeal the Interior Board of Land Appeals decision. As of June 30, 2024, the value of the surety bond posted is $9.9 million.
The Company has continued to pursue its legal rights and, at present, the case is in front of the U.S. District Court for the Eastern District of Louisiana where both parties have filed cross-motions for summary judgment and opposition briefs. The Company has filed a Reply in support of its Motion for Summary Judgment, and the government has in turn filed its Reply brief. With briefing now completed, the Company is waiting for the district court’s ruling on the merits.
ONRR Audit of Historical Refund Claims
In 2023, the Company received notification from the ONRR regarding results of an audit performed on the Company’s historical refund claims taken on various properties for alleged royalties owed to the ONRR. The review process is ongoing, and the Company does not believe any accrual is necessary at this time.
Contingent Decommissioning Obligations
The Company may be subject to retained liabilities with respect to certain divested property interests by operation of law. Certain counterparties in past divestiture transactions or third parties in existing leases that have filed for bankruptcy protection or undergone associated reorganizations may not be able to perform required abandonment obligations. Due to operation of law, the Company may be required to assume decommissioning obligations for those interests. The Company may be held jointly and severally liable for the decommissioning of various facilities and related wells. The Company no longer owns these assets, nor are they related to current operations.
During the six months ended June 30, 2024, the Company incurred $8.4 million in costs related to these decommissioning obligations and reassessed the existing decommissioning obligations, recording an additional $7.0 million. As of June 30, 2024, the remaining loss contingency recorded related to the anticipated decommissioning obligations was $16.7 million.
Although it is reasonably possible that the Company could receive state or federal decommissioning orders in the future or be notified of defaulting third parties in existing leases, the Company cannot predict with certainty, if, how or when such orders or notices will be resolved or estimate a possible loss or range of loss that may result from such orders. However, the Company could incur judgments, enter into settlements or revise the Company’s opinion regarding the outcome of certain notices or matters, and such developments could have a material adverse effect on the Company’s results of operations in the period in which the amounts are accrued and the Company’s cash flows in the period in which the amounts are paid. To the extent the Company does incur costs associated with these properties in future periods, the Company intends to seek contribution from other parties that owned an interest in the facilities.
Other Claims
In the ordinary course of business, the Company is a party to various pending or threatened claims and complaints seeking damages or other remedies concerning commercial operations and other matters. In addition, claims or contingencies may arise related to matters occurring prior to the Company’s acquisition of properties or related to matters occurring subsequent to the Company’s sale of properties. In certain cases, the Company has indemnified the sellers of properties acquired, and in other cases, has indemnified the buyers of properties sold. The Company is also
9
subject to federal and state administrative proceedings conducted in the ordinary course of business including matters related to alleged royalty underpayments on certain federal-owned properties. Although the Company can give no assurance about the outcome of pending legal and federal or state administrative proceedings and the effect such an outcome may have, the Company believes that any ultimate liability resulting from the outcome of such proceedings, to the extent not otherwise provided for or covered by insurance, will not have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company.
NOTE 7 — INVESTMENT IN MONZA
In March 2018, the Company and other members formed and funded Monza, which jointly participates with the Company in the exploration, drilling and development of certain drilling projects (“Joint Venture Drilling Program”) in the Gulf of Mexico. The total commitments by all members, including the Company’s commitment to fund its retained interest in Monza projects held outside of Monza, was $361.4 million. The Company contributed 88.94% of its working interest in certain undeveloped drilling projects to Monza and retained 11.06% of its working interest. The Joint Venture Drilling Program is structured so that the Company initially received an aggregate of 30.0% of the revenues less expenses, through the direct ownership from the retained working interest in the Monza projects and the Company’s indirect interest through its interest in Monza, for contributing 20.0% of the estimated total well costs plus associated leases and providing access to available infrastructure at agreed-upon rates.
The members of Monza are third-party investors, the Company and an entity owned and controlled by the Company’s Chief Executive Officer (“CEO”). The entity affiliated with the Company’s CEO invested as a minority investor on the same terms and conditions as the third-party investors.
The Company’s interest in Monza is considered to be a variable interest that is proportionally consolidated. The Company does not fully consolidate Monza because the Company is not considered the primary beneficiary of Monza.
The following table presents the amounts recorded by the Company on the Condensed Consolidated Balance Sheets related to the consolidation of the proportional interest in Monza’s operations (in thousands):
Working capital
913
1,159
29,911
31,805
12,284
11,694
642
593
The following table presents the amounts recorded by the Company in the Condensed Consolidated Statements of Operations related to the consolidation of the proportional interest in Monza’s operations (in thousands):
5,700
6,018
3,636
4,623
Interest income
111
104
As required, the Company may call on Monza to provide cash to fund its portion of certain projects in advance of capital expenditure spending. As of June 30, 2024 and December 31, 2023, the unused advances were $2.6 million and $2.7 million, respectively, which are included in Advances from joint interest partners in the Condensed Consolidated Balance Sheets.
During the six months ended June 30, 2024, Monza paid cash distributions of $18.0 million, of which $3.8 million was paid to the Company.
10
NOTE 8 — STOCKHOLDERS’ EQUITY
On March 5, 2024, the Company’s board of directors declared a regular quarterly dividend of $0.01 per share of common stock for the first quarter of 2024. The dividend of $1.5 million was paid on March 25, 2024 to stockholders of record at the close of business on March 18, 2024.
On May 10, 2024, the Company’s board of directors declared a regular quarterly dividend of $0.01 per share of common stock for the second quarter of 2024. The dividend of $1.5 million was paid on May 31, 2024 to stockholders of record at the close of business on May 24, 2024.
On August 6, 2024, the Company’s board of directors declared a regular quarterly dividend of $0.01 per share of common stock for the third quarter of 2024. The dividend is to be paid on August 27, 2024 to stockholders of record at the close of business on August 20, 2024.
NOTE 9 — INCOME TAXES
The Company records income taxes for interim periods based on an estimated annual effective tax rate. The estimated annual effective rate is recomputed on a quarterly basis and may fluctuate due to changes in forecasted annual operating income, positive or negative changes to the valuation allowance for net deferred tax assets and changes to actual or forecasted permanent book to tax differences.
The Company’s effective tax rate for the three and six months ended June 30, 2024 was 23.1% and 11.8%, respectively. The difference between the effective tax rate and the federal statutory rate was primarily due to the impact of nondeductible compensation and adjustments to the valuation allowance. The Company’s effective tax rate for the three months ended June 30, 2023 is not meaningful primarily as a result of changes in the valuation allowance on the Company’s deferred tax assets. The Company’s effective tax rate for the six months ended June 30, 2023 was 45.6%. The difference between the effective tax rate and the federal statutory rate was primarily due to the impact of state income taxes, nondeductible compensation, and adjustments to the valuation allowance.
As of June 30, 2024 and December 31, 2023, the Company had a valuation allowance of $27.1 million and $23.2 million, respectively, primarily related to state net operating losses and the disallowed interest expense limitation carryover. At each reporting date, the Company considers all available positive and negative evidence to evaluate whether its deferred tax assets are more likely than not to be realized.
NOTE 10 — NET (LOSS) INCOME PER SHARE
The following table presents the calculation of basic and diluted net (loss) income per common share (in thousands, except per share amounts):
Weighted average common shares outstanding - basic
Dilutive effect of securities
2,610
Weighted average common shares outstanding - diluted
Shares excluded due to being anti-dilutive
1,724
2,909
11
NOTE 11 — OTHER SUPPLEMENTAL INFORMATION
Condensed Consolidated Balance Sheet Details
Prepaid expenses and other current assets consisted of the following (in thousands):
Derivatives
Insurance/bond premiums
12,205
6,631
Prepaid deposits related to royalties
8,562
7,872
Prepayments to vendors
2,288
1,492
874
272
Accrued liabilities consisted of the following (in thousands):
Accrued interest
13,479
Accrued salaries/payroll taxes/benefits
3,258
9,473
Operating lease liabilities
1,484
1,455
1,838
1,304
Total accrued liabilities
Condensed Consolidated Statements of Cash Flows Information
Supplemental statements of cash flows information consisted of the following (in thousands):
Cash, cash equivalents and restricted cash
Non-cash investing activities:
Accruals of property and equipment
5,440
4,297
Dividends declared but not paid on unvested share-based awards
36
ARO - acquisitions, additions and revisions, net
31,288
11,016
NOTE 12 — SUBSIDIARY BORROWERS
Aquasition LLC and Aquasition II, LLC (collectively, the “Subsidiary Borrowers”) are indirect, wholly-owned subsidiaries of the Company. The Subsidiary Borrowers used the net proceeds from the Term Loan (see Note 3 – Debt) to acquire all of the Company’s interests in certain oil and gas leasehold interests and associated wells and units located in State of Alabama waters and U.S. federal waters in the offshore Gulf of Mexico, Mobile Bay region and the Company’s interest in certain gathering and processing assets located offshore Gulf of Mexico, Mobile Bay region and onshore near Mobile, Alabama, including offshore gathering pipelines, an onshore crude oil treating and sweetening facility, an onshore gathering pipeline, and associated assets.
12
The assets of the Subsidiary Borrowers are not available to satisfy the debt or contractual obligations of any other entities, including debt securities or other contractual obligations of the Company, and the Subsidiary Borrowers do not bear any liability for the indebtedness or other contractual obligations of any other entities, and vice versa.
The following table presents the amounts recorded by the Company on the Condensed Consolidated Balance Sheets related to the consolidation of Aquasition Energy LLC, the parent of the Subsidiary Borrowers (the “Subsidiary Parent”), and the Subsidiary Borrowers (in thousands):
Assets:
4,453
600
Receivables:
Oil and natural gas sales
11,630
19,171
Joint interest, net
(21,319)
(33,151)
834
612
285,393
287,313
5,689
8,097
Liabilities:
2,979
4,473
9,830
7,152
5,747
4,359
Current portion of long-term debt, net
14,400
28,872
70,914
67,771
97,260
82,317
4,261
6,749
The following table presents the amounts recorded by the Company in the Condensed Consolidated Statements of Operations related to the consolidation of the operations of the Subsidiary Borrowers and the Subsidiary Parent (in thousands):
20,698
25,437
40,966
46,560
20,386
30,443
39,260
50,490
2,209
3,229
4,451
5,411
2,446
(6,012)
(3,129)
(52,389)
13
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes included in Part I, Item 1. Financial Statements, of this Quarterly Report, as well as our audited consolidated financial statements and the notes thereto in the 2023 Annual Report and the related MD&A included in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our 2023 Annual Report. Unless otherwise indicated or the context otherwise requires, references in this Quarterly Report to “us,” “we” and “our” are to W&T Offshore, Inc. and its wholly owned subsidiaries.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The information in this Quarterly Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact included in this Quarterly Report, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. These forward-looking statements are based on certain assumptions and analyses made by us in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. Although we believe that these forward-looking statements are based upon reasonable assumptions, they are subject to several risks and uncertainties and are made in light of information currently available to us. If the risks or uncertainties materialize or the assumptions prove incorrect, our results may differ materially from those expressed or implied by such forward-looking statements and assumptions. When used in this Quarterly Report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” “forecast,” “may,” “objective,” “plan,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We assume no obligation, nor do we intend, to update these forward-looking statements, unless required by law.
The information included in this Quarterly Report includes forward-looking statements that involve risks and uncertainties that could materially affect our expected results of operations, liquidity, cash flows and business prospects. Such statements specifically include our expectations as to our future financial position, liquidity, cash flows, results of operations and business strategy, potential acquisition opportunities, other plans and objectives for operations, capital for sustained production levels, expected production and operating costs, reserves, hedging activities, capital expenditures, return of capital, improvement of recovery factors and other guidance. Actual results may differ from anticipated results, sometimes materially, and reported results should not be considered an indication of future performance. For any such forward-looking statement that includes a statement of the assumptions or bases underlying such forward-looking statement, we caution that, while we believe such assumptions or bases to be reasonable and make them in good faith, assumed facts or bases almost always vary from actual results, sometimes materially. Known material risks that may affect our financial condition and results of operations are discussed in Part I, Item 1A. Risk Factors, and market risks are discussed in Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk, of our 2023 Annual Report, and may be discussed or updated from time to time in subsequent reports filed with the SEC.
Reserve engineering is a process of estimating underground accumulations of crude oil, NGLs and natural gas that cannot be measured in an exact manner. The accuracy of any reserve estimate depends on the quality of available data, the interpretation of such data, and the price and cost assumptions made by reservoir engineers. In addition, the results of drilling, testing, and production activities, or changes in commodity prices, may justify revisions of estimates that were made previously. If significant, such revisions would change the schedule of any further production and development drilling. Accordingly, reserve estimates may differ significantly from the quantities of crude oil, NGLs and natural gas that are ultimately recovered.
All forward-looking statements, expressed or implied, included in this Quarterly Report are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue.
BUSINESS OVERVIEW
We are an independent oil and natural gas producer, active in the exploration, development and acquisition of oil and natural gas properties in the Gulf of Mexico. As of June 30, 2024, we hold working interests in 63 producing offshore fields in federal and state waters (which include 55 fields in federal waters and 8 in state waters). We currently have under lease approximately 678,100 gross acres (520,400 net acres) spanning across the outer continental shelf off the coasts of Louisiana, Texas, Mississippi and Alabama, with approximately 5,600 gross acres in Alabama state waters, 519,000 gross acres on the conventional shelf and approximately 153,500 gross acres in the deepwater. A majority of our daily production is derived from wells we operate.
Recent Developments
In April 2024, the Bureau of Ocean Energy Management (“BOEM”) released a final rule that changes the way BOEM evaluates the financial health of companies and offshore assets in setting financial assurance requirements. Under the new rule, BOEM streamlined the criteria used to evaluate the financial health of an energy company down to two factors: (i) the company’s credit rating, and (ii) the ratio of the value of the company’s proved reserves to decommissioning liability associated with those reserves. The new rule also codifies the usage of Bureau of Safety and Environmental Enforcement decommissioning estimates to evaluate supplemental financial assurance requirements and allows third party guarantors (upon agreement with BOEM) to provide limited guarantees to specific amounts or specific leases instead of the blanket guarantees that have been used in the past. Finally, the new rule also requires a base financial assurance requirement of $500,000 for federal rights-of-use and easements (“RUEs”) to match the requirement for state RUEs. To provide the industry with flexibility to meet the new financial assurance requirements, BOEM will allow current lessees and grant holders to request phased-in payments over a three-year period. BOEM estimates that the industry will be required to provide $6.9 billion in new financial assurances under the new rule, which took effect on June 29, 2024. Following the announcement of the new rule, a series of lawsuits from both states and industry groups have been filed against BOEM to block the implementation of the new rule. We are actively monitoring ongoing litigation with respect to the new rule.
On June 28, 2024, we amended the Credit Agreement to (i) extend the maturity date to December 31, 2024, (ii) prohibit the use of loan proceeds to pay other Indebtedness (as defined in the Credit Agreement), and (iii) lower the excess cash balance sweep threshold.
On August 6, 2024, we declared a regular quarterly dividend of $0.01 per share for the third quarter of 2024. We expect to pay the dividend on August 27, 2024, to stockholders of record as of the close of business on August 20, 2024.
Business Outlook
Our financial condition, cash flow and results of operations are significantly affected by the volume of our oil, NGLs and natural gas production and the prices that we receive for such production. Changes in the prices that we receive for our production impact all aspects of our business; most notably our cash flows from operations, revenues, capital allocation and budgeting decisions and our reserves volumes. Prices of oil, NGLs and natural gas have historically been volatile and can fluctuate significantly over short periods of time for many factors outside of our control, including changes in market supply and demand, which are impacted by weather conditions, pipeline capacity constraints, inventory storage levels, domestic production activities and political issues, and international geopolitical and economic events.
15
Spot prices for West Texas Intermediate (“WTI”) oil averaged $79.77 per barrel in June 2024, relatively unchanged from May 2024. Prices fell to $74.27 per barrel on June 4, 2024 following the Organization of the Petroleum Exporting Countries and Russia (“OPEC+”) meeting on June 2, 2024, when the group announced that 2.2 million barrels of oil per day of voluntary cuts would gradually be unwound beginning in the fourth quarter of 2024. Prices fell following this announcement as market participants assessed that unwinding production cuts could cause a significant increase in global oil inventories. The WTI spot price then reached a high of $85.19 per barrel on July 3, 2024, as market participants reassessed the announcement based on current global oil inventory levels and the indication by OPEC+ that production cuts remain subject to market conditions. In its latest Short-Term Energy Outlook published in July 2024, the U.S. Energy Information Administration (“EIA”) is forecasting that WTI spot prices are expected to average $84.33 per barrel for the second half of 2024 and $86.17 per barrel for the first quarter of 2025.
Spot prices for Henry Hub natural gas averaged $2.53 per MMBtu in June 2024. At the end of June 2024, there was 19% more natural gas in storage compared with the five-year average. The EIA is forecasting that less natural gas will be injected into storage than the five-year average this summer season because of relatively flat production in the second half of 2024 and a seasonal increase in demand from the electric power sector. Despite the relatively flat production, the EIA still expects the U.S. will end the injection season in October 2024 with 6% more natural gas in storage than the five-year average. The EIA is forecasting that Henry Hub spot prices are expected to average $2.86 per MMBtu in the second half of 2024 and $3.29 per MMBtu in 2025.
Our average realized sales price for oil and natural gas differs from the WTI average price and the NYMEX Henry Hub average price, respectively, primarily due to premiums or discounts, quality adjustments, location adjustments and volume weighting (collectively referred to as differentials). Oil price differentials primarily represent the transportation costs in moving produced oil at the wellhead to a refinery and are based on the availability of pipeline, rail and other transportation. Natural gas price differentials are strongly impacted by local market fundamentals, availability of transportation capacity from producing areas and seasonal impacts. Prices and differentials for NGLs are related to the supply and demand for the products making up these liquids. Some of them more typically correlate to the price of oil while others are affected by natural gas prices as well as the demand for certain chemical products which are used as feedstock.
In addition to the impact of volatile commodity prices on our operations, continuing inflation could also impact our sales margins and profitability. The annual inflation rate for June 2024 was 3.0%, a decrease from the 3.3% rate for May 2024. Although inflation seems to be easing, the Federal Reserve left the fed funds target range steady at 5.25% to 5.50% for a seventh consecutive meeting in June 2024. Policymakers do not expect it will be appropriate to reduce rates until they gain greater confidence that inflation is moving sustainably toward 2%. Policymakers see only one rate cut this year and four reductions in 2025. However, if inflation were to begin to rise again, it is possible the Federal Reserve would continue to take action they deem necessary to bring inflation down and to ensure price stability, including further rate increases, which could have the effects of raising the cost of capital and depressing economic growth, either or both of which could negatively impact our business.
16
RESULTS OF OPERATIONS
Three Months Ended June 30, 2024 Compared to the Three Months Ended June 30, 2023
Revenues
The following table presents information regarding our revenues, production volumes and average realized sales prices (which exclude the effect of hedging unless otherwise stated) for the three months ended June 30, 2024 and 2023 (in thousands, except average realized sales prices data):
Change
%
20,983
23.3
(2,225)
(21.4)
(1,528)
(6.5)
(654)
(27.5)
16,576
13.1
Production Volumes:
Oil (MBbls) (1)
1,382
1,254
128
10.2
NGLs (MBbls)
334
443
(109)
(24.6)
Natural gas (MMcf) (2)
8,769
10,023
(1,254)
(12.5)
Total oil equivalent (MBoe) (3)
3,177
3,368
(191)
(5.7)
Average daily equivalent sales (Boe/day)
34,912
37,011
(2,099)
Average realized sales prices:
Oil ($/Bbl)
80.29
71.76
8.53
11.9
NGLs ($/Bbl)
24.43
23.44
0.99
4.2
Natural gas ($/Mcf)
2.34
0.16
6.8
Oil equivalent ($/Boe)
44.40
36.76
7.64
20.8
Oil equivalent ($/Boe), including realized commodity derivatives
44.51
36.67
7.84
21.4
Changes in average sales prices and production volumes caused the following changes to our oil, NGL and natural gas revenues between the three months ended June 30, 2024 and 2023 (in thousands):
Price
Volume
11,849
9,134
322
(2,547)
1,405
(2,933)
13,576
3,654
17,230
17
Production volumes decreased by 191 MBoe to 3,177 MBoe during the three months ended June 30, 2024 compared to the same period in 2023, driven by lower NGL and natural gas volumes. This decrease in NGL and natural gas volumes was primarily related to our primary Mobile Bay processing plant getting shut-in by the third-party operator to perform a turnaround. This forced us to re-route Mobile Bay volumes to a separate third-party processing plant that did not have the same capacity, leading to curtailed production and sales. These decreases were partially offset by increased production from wells acquired in both January 2024 and September 2023.
Operating Expenses
The following table presents information regarding costs and expenses and selected average costs and expenses per Boe sold for the periods presented and corresponding changes (in thousands, except average data):
7,966
1,776
Depreciation, depletion and amortization
8,497
683
3,961
22,883
Average per Boe ($/Boe):
23.29
19.60
3.69
2.70
2.02
0.68
11.55
8.37
3.18
2.64
2.29
0.35
6.72
5.16
1.56
46.90
37.44
9.46
Lease operating expenses – Lease operating expenses, which include base lease operating expenses, workovers, and facilities maintenance expense, increased $8.0 million to $74.0 million during the three months ended June 30, 2024 compared to the same period in 2023. On a component basis, base lease operating expenses increased $8.9 million, workover expenses decreased $6.7 million, and facilities maintenance expense increased $5.8 million.
Expenses for direct labor, materials, supplies, repair, third-party costs and insurance comprise the most significant portion of our base lease operating expense. Base lease operating expenses increased primarily due to three months of expenses at the fields acquired in January 2024 and September 2023.
Workover and facilities maintenance expenses consist of costs associated with major remedial operations on completed wells to restore, maintain or improve the well’s production. Since these remedial operations are not regularly scheduled, workover and maintenance expense are not necessarily comparable from period to period. The decrease in workover expenses and the increase in facilities maintenance expenses were due to the timing and mix of projects undertaken.
Gathering, transportation and production taxes – Gathering, transportation and production taxes increased $1.8 million for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 primarily due to higher processing fees for our Mobile Bay production that had to be re-routed to a different processing plant.
Depreciation, depletion and amortization (“DD&A”) – DD&A increased $8.5 million for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023. The DD&A rate increased to $11.55 per Boe for the three months ended June 30, 2024 from $8.37 per Boe for the three months ended June 30, 2023. The DD&A rate per Boe increased primarily as a result of a higher depreciable base due to our January 2024 acquisition, increases in capital expenditures, future development costs and capitalized ARO and lower proved reserves.
18
Asset retirement obligations accretion expense – Accretion expense is the expensing of the changes in value of our ARO as a result of the passage of time over the estimated productive life of the related assets as the discounted liabilities are accreted to their expected settlement values. Accretion expense increased $0.7 million in the three months ended June 30, 2024 compared to the same period in 2023 primarily due to the increase in our ARO liability as a result of our January 2024 acquisition and revisions to the estimates used in calculating the liability.
General and administrative expenses (“G&A”) – G&A increased $4.0 million to $21.4 million for the three months ended June 30, 2024 as compared to $17.4 million for the three months ended June 30, 2023. The increase is primarily due to non-recurring professional and legal services.
Other Income and Expense Items
The following table presents the components of other income and expense items for the periods presented and corresponding changes (in thousands):
(159)
3,203
1,561
(7,633)
Interest expense, net – Interest expense, net, was relatively flat for the three months ended June 30, 2024 compared to the same period in 2023 primarily due to a decrease in interest expense on the lower outstanding principal balance of the Term Loan, partially offset by a decrease in interest income.
Derivative loss (gain), net – During the three months ended June 30, 2024, we recorded a $2.4 million derivative loss for our natural gas derivative contracts consisting of $2.7 million of unrealized loss from the decrease in the fair value of our open natural gas contracts and $0.3 million of realized gains. During the three months ended June 30, 2023, we recorded a $0.8 million derivative gain for our natural gas derivative contracts consisting of $0.3 million in realized losses and $1.1 million of unrealized gain from the increase in the fair value of our open natural gas contracts.
Unrealized gains or losses on open derivative contracts are recorded as a gain or loss on our Condensed Consolidated Statements of Operations at the end of each month. As a result of the derivative contracts we have on our anticipated production volumes through April 2028, we expect these activities to continue to impact net income (loss) based on fluctuations in market prices for natural gas. See Part I, Item 1. Financial Statements – Note 4 – Financial Instruments of this Quarterly Report for additional information.
Other expense (income), net – Other expense, net increased $1.6 million for the three months ended June 30, 2024 compared to the same period in 2023 primarily related to the accrual of additional expenses for net abandonment obligations pertaining to a number of legacy Gulf of Mexico properties.
Income tax (benefit) expense – Our effective tax rate for the three months ended June 30, 2024 was 23.1%. The difference between the effective tax rate and the federal statutory rate was primarily due to the impact of nondeductible compensation and adjustments to the valuation allowance. Our effective tax rate for the three months ended June 30, 2023 is not meaningful primarily as a result of changes in the valuation allowance on our deferred tax assets.
19
Six Months Ended June 30, 2024 Compared to the Six Months Ended June 30, 2023
The following table presents information regarding our revenues, production volumes and average realized sales prices (which exclude the effect of hedging unless otherwise stated) for the six months ended June 30, 2024 and 2023 (in thousands, except average realized sales prices data):
30,998
16.6
(2,551)
(14.0)
(4,716)
(9.8)
1,907
42.4
25,638
9.9
Oil (MBbls)
2,782
2,604
178
677
738
(61)
(8.3)
Natural gas (MMcf)
17,502
17,699
(197)
(1.1)
Total oil equivalent (MBoe)
6,376
6,292
84
1.3
35,033
34,762
271
78.35
71.81
6.54
9.1
23.09
24.63
(1.54)
(6.3)
2.49
2.73
(0.24)
(8.8)
43.47
40.27
3.20
7.9
Oil equivalent ($/Boe), including realized commodity derivatives(1)
44.11
40.19
3.92
9.8
Changes in average sales prices and production volumes caused the following changes to our oil, NGL and natural gas revenues between the six months ended June 30, 2024 and 2023 (in thousands):
18,239
12,759
(1,067)
(1,484)
(4,177)
(539)
12,995
10,736
23,731
Production volumes increased by 84 Mboe to 6,376 Mboe during the six months ended June 30, 2024 compared to the same period in 2023, primarily due to both the January 2024 and the September 2023 acquisitions, partially offset by the change in the NGL and natural gas processing plant and normal production decline on existing wells.
13,610
3,180
19,810
Asset retirement obligations accretion expense
1,142
4,557
42,299
22.71
20.85
1.86
2.53
2.06
0.47
11.07
8.07
3.00
2.57
2.42
0.15
6.57
5.93
0.64
45.45
39.33
6.12
Lease operating expenses – Lease operating expenses, which include base lease operating expenses, workovers, and facilities maintenance expense, increased $13.6 million to $144.8 million during the six months ended June 30, 2024 compared to the same period in 2023. On a component basis, base lease operating expenses increased $22.1 million, workover expenses decreased $8.7 million, and facilities maintenance expense increased $0.2 million.
Base lease operating expenses increased primarily due to three months of expenses at the fields acquired in January 2024 and September 2023, as well as higher repair, maintenance and labor costs at other fields.
Gathering, transportation and production taxes – Gathering, transportation and production taxes increased $3.2 million for the six months ended June 30, 2024 compared to the same period in 2023 primarily due to the increase in production in the three months ended March 31, 2024 and higher processing fees for our Mobile Bay production that had to be re-routed to a different processing plant, partially offset by the decrease in realized prices for natural gas.
DD&A – DD&A increased $19.8 million for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023. The DD&A rate increased to $11.07 per Boe for the six months ended June 30, 2024 from $8.07 per Boe for the six months ended June 30, 2023. The DD&A rate per Boe increased primarily as a result of a higher depreciable base due to our January 2024 acquisition, increases in capital expenditures, future development costs and capitalized ARO and lower proved reserves.
Asset retirement obligations accretion expense – Accretion expense increased $1.1 million in the six months ended June 30, 2024 compared to the same period in 2023 primarily due to the increase in our ARO liability related to our acquisitions in September 2023 and January 2024 and revisions to the estimates used in calculating the liability.
G&A – G&A increased $4.6 million to $41.9 million for the six months ended June 30, 2024 as compared to $37.3 million for the six months ended June 30, 2023. The increase is primarily due to non-recurring professional and legal services and higher medical claims.
21
(4,800)
37,566
6,558
(15,227)
Interest expense, net – Interest expense, net, decreased $4.8 million for the six months ended June 30, 2024 compared to the same period in 2023 due to the redemption of the 9.75% Notes in February 2023 and a decrease in interest expense on the lower outstanding principal balance of the Term Loan, partially offset by interest expense incurred on the 11.75% Notes issued in late January 2023 and a decrease in interest income.
Derivative gain, net – During the six months ended June 30, 2024, we recorded a $2.5 million derivative gain for our natural gas derivative contracts consisting of $4.1 million of realized gains offset by $1.6 million of unrealized losses from the decrease in the fair value of our open natural gas contracts. During the six months ended June 30, 2023, we recorded a $40.1 million derivative gain for our natural gas derivative contracts consisting of $40.6 million in unrealized gains from the increase in the fair value of our open derivative contracts and $0.5 million of realized losses.
Other expense (income), net – Other expense, net increased $6.6 million for the six months ended June 30, 2024 compared to the same period in 2023 primarily related to the accrual of additional expenses for net abandonment obligations pertaining to a number of legacy Gulf of Mexico properties.
Income tax (benefit) expense – Our effective tax rates for the six months ended June 30, 2024 and 2023 were 11.8% and 45.6%, respectively. The effective tax rates differed from the statutory federal tax rate primarily due to the impact of state income taxes, nondeductible compensation, and adjustments to the valuation allowance.
Liquidity and Capital Resources
Liquidity Overview
Our primary liquidity needs are to fund capital and operating expenditures and strategic acquisitions to allow us to replace our oil and natural gas reserves, repay and service outstanding borrowings, operate our properties and satisfy our ARO. We have funded such activities in the past with cash on hand, net cash provided by operating activities, sales of property, securities offerings and bank and other borrowings, and expect to continue to do so in the future.
We expect to support our business requirements primarily with cash on hand and cash generated from operations. As of June 30, 2024, we had $123.4 million cash on hand and $50.0 million available under our Credit Agreement, based on a borrowing base of $50.0 million. We also have up to approximately $83.0 million of availability through our “at-the-market” equity offering program, pursuant to which we may offer and sell shares of our common stock from time to time. Based on our current financial condition and current expectations of future market conditions, we believe our cash on hand, cash flows from operating activities and access to the equity markets from our “at-the-market” equity offering program will provide us with additional liquidity to continue our growth and will allow us to meet our cash requirements for at least the next 12 months.
We continuously review our liquidity and capital resources. If market conditions were to change, for instance due to uncertainty created by geopolitical events, a pandemic or a significant decline in oil and natural gas prices, and our revenue was reduced significantly or operating costs were to increase significantly, our cash flows and liquidity could be negatively impacted.
22
Cash Flow Information
The following table summarizes cash flows provided by (used in) by type of activity for the following periods (in thousands):
Operating activities
(544)
Investing activities
(59,850)
Financing activities
300,161
Operating Activities – Net cash provided by operating activities decreased $0.5 million for the six months ended June 30, 2024 compared to the corresponding period in 2023. This was primarily due to a $10.4 million increase in net (loss) income adjusted for certain noncash items offset by a $10.9 million decrease in operating cash flows from changes in operating assets and liabilities. The increase in net (loss) income adjusted for certain noncash items was primarily related to a $25.6 million increase in revenues and a $9.4 million increase in derivative cash settlements, partially offset by increases in cash operating expenses. The decrease in operating assets and liabilities primarily related to higher accounts receivable balances due to increased revenues partially offset by higher accounts payable and accrued liabilities balances in the current period.
Investing Activities – Net cash used in investing activities increased $59.9 million for the six months ended June 30, 2024 compared to the corresponding period in 2023. This was primarily due to $80.6 million of acquisition of property interests costs, partially offset by a decrease of $11.7 million in investment in oil and natural gas properties and equipment.
Financing Activities – Net cash used in financing activities decreased by $300.2 million for the six months ended June 30, 2024 compared to the corresponding period in 2023. This was primarily due to the redemption of the $552.5 million principal amount outstanding 9.75% Notes in February 2023 partially offset by the net cash proceeds of $275.0 million received from the issuance of the 11.75% Notes in January 2023.
Capital Expenditures
The level of our investment in oil and natural gas properties changes from time to time depending on numerous factors, including the prices of oil, NGLs and natural gas, acquisition opportunities, liquidity and financing options and the results of our exploration and development activities.
The following table presents our capital expenditures for exploration, development, acquisitions and other leasehold costs (in thousands):
Exploration and development
Conventional shelf (1)
6,931
6,898
Deepwater
4,731
14,122
Acquisitions of interests
80,635
Seismic and other
275
1,979
Investments in oil and gas property/equipment – accrual basis
92,572
22,999
As of June 30, 2024, we expect to incur an additional $30.0 million to $35.0 million of capital expenditures in the next six months, which excludes acquisitions. In our view of the outlook for the remainder of 2024, we believe this level of capital expenditure will leave us with sufficient liquidity to operate our business, while providing liquidity to make strategic acquisitions. At current pricing levels, we expect our cash flows to cover our liquidity requirements, and we expect additional financing sources to be available if needed. If our liquidity becomes stressed from significant or
23
prolonged reductions in realized prices, we have flexibility in our capital expenditure budget to reduce investments. We strive to maintain flexibility in our capital expenditure projects and if commodity prices improve, we may increase our investments.
Acquisitions
We have grown by making strategic acquisitions of producing properties in the Gulf of Mexico. We seek opportunities where we can exploit additional drilling projects and reduce costs. In January 2024, we closed on the acquisition of rights, titles and interest in and to certain leases, wells and personal property in the central shelf region of the Gulf of Mexico, among other assets, for $77.3 million, subject to customary purchase price adjustments. The transaction was funded with cash on hand. We also received a final settlement statement for our September 2023 acquisition of certain oil and natural gas producing assets in the central and eastern shelf region of the Gulf of Mexico and recorded an additional $3.3 million of oil and natural gas properties.
Any future acquisitions are subject to the completion of satisfactory due diligence, the negotiation and resolution of significant legal issues, the negotiation, documentation and completion of mutually satisfactory definitive agreements among the parties, the consent of our lenders, our ability to finance the acquisition and approval of our board of directors. We cannot guarantee that any such potential transaction would be completed on acceptable terms, if at all.
Asset Retirement Obligations
We have obligations to plug and abandon wells, remove platforms, pipelines, facilities and equipment and restore the land or seabed at the end of oil and natural gas production operations. Through the six months ended June 30, 2024, we have paid $12.0 million related to these obligations, and we expect to incur an additional $25.0 million to $30.0 million of payments during the next six months. Our ARO estimates as of June 30, 2024 and December 31, 2023 were $534.5 million and $498.8 million, respectively. As our ARO estimates are for work to be performed in the future, and in the case of our non-current ARO, extend from one to many years in the future, actual expenditures could be substantially different than our estimates. See Part I, Item 1A. Risk Factors, of our 2023 Annual Report for additional information.
As of June 30, 2024, we have $399.6 million in aggregate principal amount of long-term debt outstanding, with $16.4 million in aggregate principal coming due over the next twelve months.
For additional information about our long-term debt, see Part I, Item 1. Financial Statements – Note 3 – Debt of this Quarterly Report and Part II, Item 8. Financial Statements and Supplementary Data, in our 2023 Annual Report.
Dividends
In November 2023, our board of directors approved the implementation of a quarterly cash dividend payable to holders of common stock. During the six months ended June 30, 2024, we have paid two cash dividends, totaling approximately $3.0 million, to holders of our common stock. The amount and frequency of future dividends is subject to the discretion of our board of directors and primarily depends on earnings, capital expenditures, debt covenants and various other factors.
Contractual Obligations and Commitments
Our material cash commitments from known contractual and other obligations consist primarily of obligations for long-term debt and related interest, operating leases, ARO and other obligations as part of normal operations. Except as disclosed herein, contractual obligations as of June 30, 2024 did not change materially from the disclosures in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our 2023 Annual Report.
24
THE SUBSIDIARY BORROWERS
Aquasition LLC and Aquasition II LLC are both indirect wholly-owned subsidiaries of us through their parent, Aquasition Energy LLC (collectively, the “Aquasition Entities”). We designated the Aquasition Entities as unrestricted subsidiaries under the indenture governing the 11.75% Notes. Having been so designated, the Aquasition Entities do not guarantee the 11.75% Notes, and the liens on the assets sold to the Aquasition entities have been released under the Credit Agreement. The Aquasition Entities are not bound by the covenants contained in the Credit Agreement or the indenture governing the 11.75% Notes. Under the Term Loan and related instruments, assets of the Aquasition Entities may not be available to mortgage or pledge as security to secure new indebtedness of us and our other subsidiaries.
Below is consolidating balance sheet information reflecting the elimination of the accounts of the Aquasition Entities from our Condensed Consolidated Balance Sheet as of June 30, 2024 (in thousands):
Consolidated
Elimination of Aquasition Entities
Restricted Subsidiaries
(4,453)
118,922
(11,630)
59,917
21,319
41,797
(834)
25,056
4,402
252,332
(285,393)
517,008
(5,689)
27,707
(286,680)
861,891
Liabilities and Shareholders’ Equity (Deficit)
(2,979)
86,150
(9,830)
19,174
(5,747)
57,403
Current portion of asset retirement obligation
(14,400)
525
(32,956)
201,444
Asset retirement obligations, less current portion
(70,914)
427,934
(97,260)
279,719
33,339
(4,261)
29,078
Shareholders' equity (deficit):
Common stock
(81,289)
(641,797)
Treasury stock, at cost
Total shareholders’ equity (deficit)
(76,284)
Total liabilities and shareholders’ equity (deficit)
25
Below is consolidating statement of operations information reflecting the elimination of the accounts of the Aquasition Entities from our Condensed Consolidated Statement of Operations for the six months ended June 30, 2024 (in thousands):
(295)
217,685
(10,804)
4,825
(27,675)
15,851
(2,192)
4,217
(40,966)
242,578
(27,789)
117,028
11,691
(3,642)
66,969
(2,704)
13,665
(698)
41,171
(39,260)
250,524
Operating loss
(1,706)
(7,946)
(4,451)
15,785
Derivative (gain) loss, net
3,129
626
Other expense, net
Loss before income taxes
(384)
(30,837)
Income tax expense
(27,246)
Our produced oil, NGLs and natural gas volumes (net to our interests) from the Aquasition Entities are as follows:
454
465
10,498
11,570
2,211
2,400
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our major market risk exposure is the fluctuation of prices for oil, NGL and natural gas. These fluctuations have a direct impact on our revenues, earnings and cash flow. For example, assuming a 10% decline in our average realized oil, NGL and natural gas sales prices in the three and six months ended June 30, 2024 and assuming no other items had changed, our revenue would have decreased by approximately $14.1 million and $27.7 million in the three and six months ended June 30, 2024, respectively.
We attempt to mitigate commodity price risk and stabilize cash flows associated with our forecasted sales of natural gas production through the use of swaps, purchased calls and purchased puts. Our derivatives will not mitigate all the commodity price risks of our forecasted sales of natural gas production and, as a result, we will be subject to commodity price risks on our remaining forecasted production.
The following table summarizes the historical results of our natural gas derivatives:
Natural Gas ($/Mcf)
Average realized sales price, before the effects of derivative settlements
Effects of realized commodity derivatives
0.04
(0.03)
0.24
Average realized sales price, including realized commodity derivatives
2.54
2.31
Our exposure to interest rate risk has not changed materially from the disclosures in Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk, of our 2023 Annual Report.
ITEM 4. CONTROLS AND PROCEDURES
We have established disclosure controls and procedures designed to ensure that material information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC and that any material information relating to us is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate to allow timely decisions regarding required disclosures. In designing and evaluating our disclosure controls and procedures, our management recognizes that controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving desired control objectives. In reaching a reasonable level of assurance, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by Exchange Act Rule 13a-15(b), our CEO and CFO performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report. Based on that evaluation, our CEO and CFO have each concluded that as of June 30, 2024, our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that our controls and procedures are designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
During the quarter ended June 30, 2024, there was no change in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 1. LEGAL PROCEEDINGS
See Part I, Item 1. Financial Statements – Note 6 – Contingencies of this Quarterly Report for information on various legal proceedings to which we are a party or our properties are subject.
ITEM 1A. RISK FACTORS
In addition to the information set forth in this Quarterly Report, investors should carefully consider the risk factors and other cautionary statements included under Part I, Item 1A. Risk Factors, in our 2023 Annual Report, together with all of the other information included in this Quarterly Report, and in our other public filings, which could materially affect our business, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.
Notwithstanding the matters discussed herein, there have been no material changes in our risk factors as previously disclosed in Part I, Item 1A. Risk Factors, in our 2023 Annual Report.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. OTHER INFORMATION
During the three months ended June 30, 2024, none of our directors or “officers” (as such term is defined in Rule 16(a)-1(f) under the Exchange Act) adopted or terminated a “Rule 10b5-1 trading agreement” or “non-Rule 10b5-1 trading arrangement (each as defined in Item 408(a) and (c) of Regulation S-K).
ITEM 6. EXHIBITS
ExhibitNumber
Description
3.1
Second Amended and Restated Articles of Incorporation of W&T Offshore, Inc. (Incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q, filed August 2, 2023)
3.2
Fourth Amended and Restated Bylaws of W&T Offshore, Inc. (Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K, filed April 26, 2023)
10.1
Seventeenth Amendment to the Sixth Amended and Restated Credit Agreement dated effective as of April 29, 2024 (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed May 1, 2024)
Eighteenth Amendment to the Sixth Amended and Restated Credit Agreement dated effective as of May 29, 2024 (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed May 30, 2024)
10.3†
Nineteenth Amendment to the Sixth Amended and Restated Credit Agreement dated effective as of June 28, 2024 (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed July 1, 2024)
31.1*
Section 302 Certification of Chief Executive Officer
31.2*
Section 302 Certification of Chief Financial Officer
32.1**
Section 906 Certification of Chief Executive Officer and Chief Financial Officer
101.INS*
Inline XBRL Instance Document
101.SCH*
Inline XBRL Schema Document
101.CAL*
Inline XBRL Calculation Linkbase Document
101.DEF*
Inline XBRL Definition Linkbase Document
101.LAB*
Inline XBRL Label Linkbase Document
101.PRE*
Inline XBRL Presentation Linkbase Document
104*
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*
Filed herewith.
**
Furnished herewith.
†
Certain of the schedules and exhibits to the agreement have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule or exhibit will be furnished to the SEC upon request.
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Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 7, 2024.
By:
/s/ Sameer Parasnis
Sameer Parasnis
Executive Vice President and Chief Financial Officer